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24.05.2016 | KPMG Law Insights

Derivatives – Insights – Derivatives | Edition No. 2/2016

Dear readers,

In the last few weeks European supervisory authorities have achieved a number of significant developments in the area of the European Markets Infrastructure Regulation (EMIR).

In particular, the regulators published the final Regulatory Technical Standards (RTS) focusing on margin requirements for non-centrally cleared derivatives.

Simultaneously, the European Parliament progressed on the adoption of the Benchmarks Regulation, while the European Securities and Markets Authority (ESMA) advanced on the Level 2 measures under the Securities Financing Transactions Regulation (SFTR) and the Benchmarks Regulation.

To follow up on these and other relevant regulatory changes affecting the derivatives / securities markets, please check out the news listed below.

Sincerely yours,

Andres Prescher

ESMA

ESMA consults on the Securities Financing Transactions Regulation (SFTR)

On 11 March 2016 the European Securities and Markets Authority (ESMA) published a Discussion Paper as part of its SFTR consultations on Level 2 measures. SFTR leverages substantially on key aspects of the European Markets Infrastructure Regulation (EMIR), which can be spotted with ease throughout the text of the Discussion Paper.

In particular, SFTR requires all securities financing transactions (including, but not limited to, securities lending and repos) to be reported to a trade repository (TR). Following this, the Discussion Paper proposes criteria for registration as a TR under SFTR. Furthermore, it details the reporting logic and the main aspects of the structure of a securities financing transactions report (e.g. illustrating the tables of fields corresponding to the relevant types of transactions).

For further information please refer to ESMA’s press release and Discussion Paper respectively.

EU

ESAs issued final draft technical standards on margin requirements for non-centrally cleared derivatives

The Joint Committee of the European Supervisory Authorities (ESAs), comprising of the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA), issued its final draft Regulatory Technical Standards (RTS) outlining the framework of the European Markets Infrastructure Regulation (EMIR) on 8 March 2016.

To this end, the draft RTS establish, inter alia, a list of eligible collateral for the exchange of margins, criteria to ensure sufficient diversification of collateral and methods to determine appropriate collateral haircuts by obliging counterparties to exchange both initial and variation margins for non-centrally cleared OTC derivatives. The margin requirements aim at reducing counterparty credit risk, mitigating potential systemic risk and ensuring alignment with international standards (e.g. the Basel Committee / the International Organization of Securities Commissions’ margin framework for non-centrally cleared OTC derivatives and the Basel Committee guidelines for managing settlement risk in FX transactions). Besides that, the draft RTS lay down legal assessments of the enforceability of the agreements and specify the criteria concerning intragroup exemptions.

The RTS shall be applied in a proportionate manner to allow counterparties to phase in the requirements starting from September 1, 2016.

For further information please refer to ESAs’ press release and the final draft RTS respectively.

EU

Clearing obligation for CDS under EMIR has been published

On 19 April 2016 the Delegated Regulation on central clearing for certain credit default OTC derivatives has been published in the Official Journal of the European Union.

The Delegated Regulation covers European untranched index credit default swaps that settle in euro with a five-year tenor on Series 17 onwards referencing either iTraxx Europe Main or iTraxx Europe Crossover.

For further information please refer to our previous newsletter and the Delegated Regulation.

EP / ESMA

Benchmarks Regulation developments

The European Parliament has adopted the text of the Benchmarks Regulation on 28 April 2016. Now to enter into force, the text needs to be further approved by the Council and subsequently published in the EU Official Journal.

Furthermore, the European Securities and Markets Authority (ESMA) published on 15 February 2016 a Discussion Paper on the Level 2 measures of the upcoming Benchmarks Regulation. In particular, the Discussion Paper seeks stakeholders’ feedback on: definition of benchmarks, requirements for the benchmark input data, governance and control requirements for supervised benchmark contributors as well as transparency requirements regarding the benchmark methodology.

On the basis of the relevant input, ESMA plans to publish a Consultation Paper later in Q3 2016.

For further information please refer to the Discussion Paper provided.

FSB

FSB released report on possible measures of non-cash collateral re-use

The Financial Stability Board (FSB) has recently issued its report on possible measures of non-cash collateral re-use and the related data elements that could potentially be included in the FSB’s global securities financing data standards. The European Securities and Markets Authority (ESMA) intends to consider, to the extent possible, the relevant results, in particular, for the preparation of the relevant technical standards (e.g. for the European Markets Infrastructure Regulation (EMIR) and the Securities Financing Transactions Regulation (SFTR)).

The FSB report provides for a starting point for discussions with market participants and researchers concerning the derivation of meaningful measures of collateral re-use. The ultimate goal is to evaluate global trends and to assess risks to financial stability. As part of its global securities financing data collection initiative, the FSB has also been considering development of a measure of collateral “velocity” (i.e. the number of times a piece of collateral is re-pledged in unrelated transactions).

For further information please refer to FSB’s report.

EC

European Commission granted equivalence to US CCPs

The European Commission determined that the US Commodity Futures Trading Commission (CFTC) envisages an equivalent regime to the European Securities and Markets Authority (ESMA) in regulating central counterparties (CCPs). This follows the previous EU and CFTC joint statement of 10 February 2016 on a common approach for transatlantic CCPs.

The decision ensures that both EU and US CCPs operate to the same high standards and also alleviates the regulatory burden for CCPs, allowing conformity under both rule-sets by complying with either the CFTC rules or EMIR respectively.

As a result, CCPs registered with the CFTC will be able to obtain recognition in the EU. Consequently market participants will be able to use them to clear standardized OTC derivative trades as required by EU legislation, while the CCPs remain subject solely to the regulation and supervision of their home jurisdiction. CCPs recognized under the European Markets Infrastructure Regulation (EMIR) will also obtain qualifying CCP status across the EU under the Capital Requirements Regulation (CRR). This means that EU banks’ exposures to these CCPs will be subject to a lower risk weight in calculating their regulatory capital.

For further information please refer to the text of the European Commission’s equivalence decision.

ESMA

ESMA consults on draft guidelines under the MAR

On 30 March 2016 the European Securities and Markets Authority (ESMA) opened a consultation on draft guidelines on information expected or required to be disclosed on commodity derivatives markets or related spot markets under the Market Abuse Regulation (MAR).

The draft guidelines provide for a non-exhaustive indicative list of information, which is divided into three categories: (i) information relating directly to a commodity derivative, (ii) information relating indirectly to a commodity derivative and (iii) information relating directly to a spot commodity contract. Each of the categories is further illustrated by examples.

It should be pointed out that the draft guidelines merely serve for informative purposes. The concept of the information preciseness and the likelihood of its significant impact on the price have not been addressed.

ESMA will consider all comments submitted online at www.esma.europa.eu by 20 May 2016.

For further information please refer to ESMA’s consultation on draft guidelines.

ESMA

ESMA amends EMIR RTS on access, aggregation and comparison of data across trade repositories

The European Securities and Markets Authority (ESMA) amended on 5 April 2016 the regulatory technical standards (RTS) on access, aggregation and comparison of data across trade repositories under Article 81 of the European Markets Infrastructure Regulation (EMIR).

In particular, ESMA proposes to specify the precise operational standards for access to, aggregation and comparison of data across trade repositories. The amendments concern (i) standardised output format of the data, based on international ISO standards, allowing comparison and aggregation across trade repositories, (ii) minimum types of queries that need to be available for the authorities, (iii) standardized and secure data exchange, based on ISO standards, between trade repositories and authorities, (iv) standard frequencies for the provision of direct and immediate access to data, and (v) secure machine-to-machine connection, based on SSH File Transfer Protocol, and use of data encryption protocols.

ESMA proposes to align the implementation date of the RTS amended with the implementation date of the amended reporting rules under Article 9 EMIR which were submitted to the European Commission on 13 November 2015.

For further information please refer to the Final Report on draft RTS.

ESMA

ESMA updated its EMIR Q&A

On 4 April 2016 the European Securities and Markets Authority (ESMA) published an update of its Questions and Answers (Q&A) on the European Markets Infrastructure Regulation (EMIR).

The update focuses solely on the population of the field “Clearing Obligation” in the trade reports. In particular, it clarifies that the field should be populated with “Y” only if a specific contract is subject to the clearing obligation, i.e. that (i) the contract pertains to one of the classes declared as subject to the clearing obligation and (ii) the contract is concluded between counterparties that are subject to the clearing obligation as of the time of execution of the contract. Furthermore, it addresses the description of the field during the frontloading period and how long it is allowed to report “X” (standing for “not available”) for the counterparties.

For further information please refer to the updated EMIR Q&A.

IOSCO

IOSCO updates information repository for OTC clearing

On 1 April 2016 the International Organization of Securities Commissions (IOSCO) released an update of its information repository for central clearing requirements for OTC derivatives, which had been officially released for the first time in August 2014.

The information repository provides regulatory authorities and market participants with consolidated information on the clearing requirements on a product-by-product level in different jurisdictions and any exemptions thereof. By doing so, it seeks foremost to assist authorities in their rule making and to help participants to comply with the relevant rules.

For further information please refer to the updated information repository.

ESMA

ESMA proposes not to exclude ETDs under MiFIR

The Markets in Financial Instruments Regulation (MiFIR) requires the European Securities and Markets Authority (ESMA) to assess whether exchange-traded derivatives (ETDs) should be exempted for a period of 30 months from the non-discriminatory access provisions of Articles 35 and 36 of MiFIR.

Following this, on 4 April 2016 ESMA has published its risk assessment report, where it concluded that the possible risks stemming from access related to ETDs are adequately addressed by the legislative frameworks of the revised Markets in Financial Instruments Directive (MiFID II), MiFIR and the European Markets Infrastructure Regulation (EMIR), including the respective draft regulatory technical standards (RTS).

Consequently, ESMA considers that the existing legislative framework provides for sufficient safeguards to tackle the risks in the context of open access and proposed to the European Parliament and Council not to introduce an ETD specific phase-in regarding the access provisions of MiFID II.

For further information please refer to ESMA’s press release and the risk assessment report respectively.

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